Global business volatility is now a systemic condition. Disruption occurs at any time, often with unprecedented magnitude, and there are no longer discrete sets of risk events with periods of stability in between. When disruptions occur, the global supply chain – now an intricately intertwined web – acts as a massive neural network, spreading impact instantly among all the connected parties. Effects cascade across the extended supply chain, and frequently gain intensity as they ripple outward from the epicenter.
In this environment, traditional supply chain risk management models break down under the strain of the unknown and unexpected. Just-in-time, lean, and other historical best practices created highly efficient supply chains. But the global pandemic showed us that these supply chains are also brittle and high risk.
In the face of this realization, a new paradigm has emerged: The resilient supply chain. This model combines efficiency and cost management with rational and appropriate contingent capacity, scale, and capability. The resilient supply chain embodies what futurist Andrew Zolli refers to as the two defining aspects of resilience: The ability to maintain a core purpose, or the ability to restore core purpose in the face of a disruption.
Updated risk management
The resilient supply chain not only reduces risk and recovers quickly from disruption, but also anticipates, rapidly adjusts, and even capitalizes on unanticipated supply chain events. By being able to respond, redirect resources, and shift to alternate strategies and tactics when a disruption occurs, resilient supply chains can capture sales and market share from competitors. True supply chain resilience creates growth and competitive advantage.
Effective supply chain risk management entails more than a simple, one-time gap assessment or prioritization exercise. It requires continuous monitoring and improvement that go beyond the company’s borders and deep into its supply chain sub tiers.
The traditional approach to managing supply chain risk follows a predictable pattern:
- Be prepared when events happen
- React – according to plan if possible
- Wait for the next event to happen
- Start the cycle again
But incremental risk management and cautious adaptation are no longer enough. With the complexity of today’s supply chain risks, companies must bolster resilience using technology to achieve extensive supplier visibility.
Let’s analyze why resilience is critical for effective risk management, and outline how companies can achieve it.
Resilience model: Four stages
Our research finds that there are four basic stages a company goes through in its evolution towards supply chain resilience.
Stage 1 – React. This stage is characterized by an individual functional approach to supply chain management and ad-hoc, reactive management of risk. There is little integration across functional boundaries. Other traits include:
- High duplication of activities
- Internally and externally disconnected processes
- Lack of coordination with supply chain partners
- Limited supply chain visibility
Stage 2 – Anticipate. At this stage, supply chains are cross-functionally organized, internal processes are integrated, and there is structured visibility between functions, with alignment of performance objectives. Risk management processes are documented and integrated internally. Basic threats and vulnerabilities are analyzed. Risk management activities, such as scenario planning and product postponement, help the organization begin to anticipate volatility more effectively. The focus, however, remains largely internal.
Stage 3 – Collaborate. At this stage, supply chains move to external collaboration and proactive risk sharing and response. Information sharing is extensive, and visibility is high, geared to set up sensors and predictors of change and variability. This visibility enables the organization to proactively design and execute response mechanisms in collaboration with at least its key external partners. Risks are formally quantified. Sub tier suppliers and partners are monitored for resilience levels and business continuity plans are created.
Stage 4 – Orchestrate. Companies are aligned with their supply chain partners on the key value dimensions across the extended enterprise. Their individual strategies and operations are guided by common objectives. Their supply chain is fully flexible to interact and adapt to complex dynamic environments. Supply chain risk strategy is segmented to the value at risk (e.g., financial loss, market share loss, damage to brand), and tiered response playbooks are developed to reflect this segmentation.
Companies with mature capabilities in supply chain management and risk management perform better than immature companies. They carry less inventory, have faster cash-to-cash cycle times, operate with shorter supply chain lead times and, in our experience, gain a 2% EBIT margin advantage.
The smarter supply chain
Supply chains move goods, but they run on information. The global, interconnected, and technology-enabled supply chain operates like a giant neural network, carrying ‘signals’ at lightning speed throughout network supply tiers. Creating this neural network improves efficiency, reduces costs, expands commerce, accelerates product flows, and creates value. But the network is only as good as its connections and the visibility they provide.
Ideally, the goal of the information supply chain is end-to-end visibility. Without adequate end-to-end visibility, including all internal and external tiers, the globally connected supply chain suffers the consequences of volatility – and in many cases, experience amplified consequences.
Smarter supply chains will take advantage of unprecedented levels of interaction – not only with customers, suppliers, and IT systems in general, but also with objects that are monitoring or even flowing through the supply chain. These objects include RFID sensors and other monitoring devices
Best-in-class risk assessment technology can provide this visibility. Supply chain software solutions including artificial intelligence and risk management tools deliver visibility into supplier production, inventory, and in-transit goods in both the inbound and outbound supply chain. This visibility is critical to managing risk and building resilience across all tiers of a supply chain network.
One company’s risk management journey
A global leader in the design and manufacture of heavy machinery recently faced an onslaught of competition from new market entrants. As a result, the company embarked on a mission to rebuild its business model – and in so doing, push its supply chain to be more agile and resilient.
“We have shifted how we look at our business,” says the company’s senior supply chain expert. “In the past, our strategy was to plan our supply chain around protecting our customers and our manufacturing operations. Hope for the best but plan for the worst.”
The result was unacceptably high inventory levels, as well as redundancies and inefficiencies in the company’s supply chain. Now, the company’s strategy is to work toward resilience via centralized control with decentralized execution.
Cloud-based visibility enables this strategy – a control tower view. “I can see everything in motion,” says the expert. “Now I can respond effectively to disruptions, see how the network is flowing, see delays and the costs they incur. I can manage a single disruption like a port labor strike but also tune my network. I can optimize because I can see everything. That allows me to drive better predictability. And I couple that with analytics to figure out what dials and levers to adjust to make improvements. That gives me a much better supply chain.”
“Our ability to get more adaptive and still drive resilience is cultural change for us,” the expert acknowledges. “We’ve always been long and lumbering. But that’s changing – due to competition and the global landscape. Our cycles are moving much faster, and we need to be able to respond.”
Recent disruptions from the COVID-19 pandemic, the Panama Canal blockage, and extreme weather events make one point clear: Supply chain vulnerability is a network-wide issue, and must be addressed on a network-wide basis. This requires higher levels of information gathering sharing across the supply chain, particularly in the sub tiers.
Best-practice companies are partnering with technology providers to re-balance their supply chains, striking the right tradeoffs between risk and reward and the cost for both. This re-balancing is based on the ability to pivot in response to volatility of any kind – be it an unexpected sales spike or a fire at a major supplier. And do so effectively and affordably.
Resilience involves building out capabilities, strategies, and tactics that:
- Assess, quantify, and value supply chain vulnerabilities and determine the value at risk resulting from those vulnerabilities
- Deliver agility, appropriate redundancy and contingent capacity that can be switched on at a moment’s notice
- Provide control tower orchestration – based on visibility and technology tools – across the supply chain
- Develop innovative approaches to anticipate future supply chain challenges, risks, and vulnerabilities; and develop strategies, practices, and tools to address them.
A resilient supply chain not only reduces risks but also anticipates, rapidly adjusts, recovers, and even capitalizes on unanticipated supply chain events or disruptions. True supply chain resilience turns risk mitigation into company growth and competitive advantage.